Budget

Guess what you and I are going to talk about today? MONEY. Yes. Money.

I have learned a few things about money in the last year and here I am sharing them with you. I think I jumped the gun with my Emergency Fund post and I should have started from here.

For those who know, my money plan used to look like this:

Single Source of Income – 100%

10% – Tithe

20% – Household Expenses x Feeding

10% – Giving

20% – Investment

20% – Recurring Expenses – Offerings, Internet, Date Night, Airtime,

10% – Turn Up money

10% – Savings

My income was slashed by half recently due to an unforeseen expense. *sigh* When this happened, my money plan looked something like this:

50% – Debt Repayment (Long story!)

50% – WTF am I supposed to do now?

So, the question is: How am I surviving? Here are a few tips that have helped me re-align my money plan since the beginning of the year.

Know yourself. You. Your habits. Recurrent expenses. Responsibilities. Desires. Seriously. You need to know yourself. How? Forget the old. Forget it, now. The old money is gone. Focus on what you have now. No Had I Knowns.

Write it all down

Debts

Yearly Expenses

Rent/Mortgage

Renewal of documents/Licenses

School Fees

Professional Membership Fees… etc

Monthly Expenses

Internet Subscription

Transportation (Uber)

Weekly/Daily Expenses

Fuel

Food

Airtime

Laundry

Self-care/Grooming

Expenses that don’t have head or tail

Car related expenses – (Currently, this means shoe expenses for me)

How many streams of income do you have? How much per stream? What are you worth? Where? If it’s zero, that’s okay. Everyone starts somewhere. If it’s 1million, all well and good. 1,000, das alright! Outline all your available monies here:

Savings

Investments

Stock

Kolo/PiggyBank

Can your number 3 cover your number 2? If not –

Do you need to cut down on your expenses or earn more?

Which one is achievable at the moment? Side hustle or minimalism? There is a sense of independence that comes with having your own money or getting paid for something you know how to do. We’ll talk about this some other time, let’s focus on what we have now.

Now, you have written down the facts. Let’s put it to work

What should your money plan look like?

If your income is monthly/weekly or as-the-deal-clicks, it does not matter. We still need to plan. Why do we need the plan? Because you need to know where your money is going. There are a few money planning recommendations I like (I always work with percentages)

The Angelina Jolie Way – Save 1/3, Live on 1/3 and give 1/3.

The Must Save Way

Living Expenses – 70%;

Long Term Goals – 20%;

Short Term Goals 10%

This one works too

Tithe – 10%;

Invest – 20%;

Living Expenses – 50% (Rent is accounted for here. If you pay your rent annually, save this in a separate account)

Do what you want – 20%

Every Naira Has Work Money Plan

Save 50%; Live on 50%

Don’t be like me. Your debt repayment should not swallow up your income like that. I was so caught up in the moment, signing post-dated cheques and It didn’t hit me till I got home. I cried eh! Like a baby.

On the next edition of the Money Series, we will talk about how to stick to the money plan you decide to build.

Homework

Carry out all the steps and choose a money plan that works for you – It is pay season, so you can make the most of this. Share in the comments section which of the Money Plans you can use based on your Income now.

Disclaimer: All these ideas, thoughts are from my head – books I have read, life experiences, amebo work… Yes, I work in a bank, but I am not a Professional Accountant, Money Manager or worevs. For professional advice, contact a professional. I am just sharing the things that have worked for me and others that I know in the past.

Did you say “God forbid” when you read emergency? I’m with you on that, fellow forbidding person.

Let us ask Merriam-Webster a few questions.

What is an Emergency?

an unforeseen combination of circumstances or the resulting state that calls for immediate action

What is a fund?

an amount of money that is used for a special purpose

What then is an Emergency Fund?

An Emergency Fund is an amount of money that is used for any unforeseen combination of circumstances or the resulting state that calls for immediate action.

2 + 2 = 4

Simply put, an emergency fund is money set aside in case of “incasity”. Incasities happen.

Job loss.

Business wahala.

Major medical emergency (Not just the individual – A partner, child, parent).

Loss of a partner, parent or benefactorWarning: Scripture Ahead

Why do you need an Emergency Fund?

To cushion any fall.

Ain’t about to be servanting to nobody! Pr.22:7 –The rich rule over the poor, and the borrower is servant to the lender.

It is a good place to start building your wealth.

My mama ain’t raise no fool – Proverbs 21: 20 – There is treasure to be desired and oil in the dwelling of the wise; but a foolish man spendeth it up.

What you gon’ do when the oil runs out?

N.B – You are not building this emergency fund to put your trust in, your trust ultimately remains in God. This God gives seed to the sower and bread to the eater – I like to be both. I sow and I eat. It all comes from him. I also enjoy being a good steward of what I get.

Proverbs 6:8 – Prepares her food in the summer, And gathers her provision in the harvest.

Some people might quote Psalm 127:1 that says “Except the LORD build the house, they labour in vain that build it” – guess what? We are building this with the Lord. It does not stop our covenant of tithing or giving or sowing.

How to build an emergency fund

Answer these questions:

As an ant, if winter shows up today? How much food should I have to survive it?

OR

If I were jobless/out of a business today, how long will it take me to get another job/build another business? How much do I need to survive in this period?

While you answer this question

Open a separate account.

Call this account: Don’t touch it. All the money goes here.

Automate It.

This is best. No, seriously. Talk to your bank about setting up a direct debit on your account into another account.

Let it go

As long as money leaves your spending account into your Emergency Fund account? Let it go. Do you have money? Nope. The Emergency Fund only exists when it is time to fund it or during emergencies.

Know your cap.

Don’t turn this into a regular savings account o. No o. You know “saving for a holiday” or “End of the year turn up savings”. No, this is the wrong place. Set a cap for this account based on your lifestyle. Your Emergency Fund can be N1,000,000 because of your answer to the ant in winter question. (by the way, N1,000,000 is a scam. Remove one naira and one is no longer a millionaire. *sigh*)

Start.

My advice to you today is simple: Start. Start small. Start big. Can you move your entire bonus into your emergency fund? All you have is 1k? I can only afford to save 5% of my income? Just start.

One day, you might need that money to rebuild your life. To get back on track…

Take it from someone who has experienced emergencies in her life – You need this fund.

ExtraTip: You can put your emergency fund in a low-risk mutual fund with an Asset Management company that gives you instant (max: 48-hours) access to it. Let it grow.

Did you enjoy the last #FeatureFriday? Our guest showed us healthy meal options on a budget! In case you missed it, check it out here.

Today, I am honoured to have the awesome Sisi On A Budget (fellow Sisi) featuring on the blog.

She will be giving us tips on how to make the best of our lives financially. If you do not have a pen and a notebook, gerrit ASAP! You do not want to miss any of these nuggets.

Amina lives in Lagos. She works in mid-management in a well-known bank and earns a decent salary. Like most 20-something year old, singles living and working in Lagos, she tries to maintain “The Fleek”.

She drives a nice car. Nothing fancy, can’t be chasing suitors away.

She lives in a nice flat in Lekki Phase 1. No flatmates though. She loves having her own space for the first time in her adult life.

Hair done, nails done, everything did!

Wardrobe of life and destiny. She likes to “Buy Nigerian” so those designers hold her mumu button.

She’s always up for a night out with the girls every other Friday. Swank restaurant, dolled up to the nines…the works.

By the end of the month, her bank account is crying out for help because…when is payday again???

While there is absolutely nothing wrong with the scenario we’ve painted above, there is no mention of a plan to secure Amina’s future.

I’m sure no one can say they enjoy being anxious so we’re going to spend some time going over the basics for building a solid financial plan to make your life work seamlessly.

Why Plan?

The importance of Financial Planning cannot be over-stressed. Even if you are of the opinion that tomorrow will take care of itself, there are other ways in which Financial Planning will make your life better today.

Managing your income better: Using a budget as a planning tool and tracking your spending will open your eyes up to the areas where you waste money. By identifying these areas and trimming them, you free up more cash for spending, saving and investing.

Regardless of the perception of living standards around you, cutting back on frivolous spending will help you on your path to building the life you want. What if Amina scales back the night outs to once a month and starts a supper club with her friends? They spend less on going out and can put the cash towards an inverter to ensure the fridge/freezer is powered all day long. The knock on effect is that she can plan to buy in bulk (which is probably cheaper) knowing she has the capacity to store the items. Hashtag Winning.

Speaking of saving and investing, notice how Amina has nothing going on in this regard? Given the current economic outlook, job security is a real concern. Life is full of uncertainty. Wouldn’t it be great, if you had a nice cushion to cover any eventuality? Freeing up cash by trimming the waste can provide the capital needed to create income generating assets that will provide some security against uncertainty.

Budgeting is a game of balance. It is important to remember that the point of the exercise is to create a comfortable life not a life of deprivation.

How can I make this work for me?

The first step to implementing a plan that will work is setting intentions.

Intention [in-ten-shuh n] noun

an act or instance of determining mentally upon some action or result.

the end or object intended; purpose.

purpose or attitude toward the effect of one’s actions or conduct.

Culled from Dictionary.com

I’ve shared in the past a Life Hacker post about finding a purpose for your money. It’s a universal truth, and something I’ve come to learn in the past year, that your intentions guide your actions, determine the direction in which you are headed, and the results you achieve in the end.

I would like you to take a few minutes to think through your life goals. These are not financial goals. It could be anything from starting a family to career choices. Don’t forget to include leisure activities! Are there any budding travel bugs reading?

Figuring out the direction you want your life to move in will determine your overall financial plan. By outlining the things you want, you can start to put a monetary value to it. Let’s take starting a family as an example.

You meet someone, get married, have babies and live happily ever after. Right?

There are costs associated with this progression. Weddings don’t come cheap. Let me rephrase, Nigerian weddings don’t come cheap! Then you have to decide:

where you want to live

the sort of house you want to live in

how many children you will have

what schools they will go to

where you will holiday in the summer months

And that’s just scratching the surface!

Make sure that the goals you set are realistic and remember to put a date on it. It’s important to figure out the timing of your plans as it subconsciously creates urgency. It will also save you from falling into a procrastination trap.

Next, you will need to take stock of where you are right now in terms of your finances. To evaluate your current financial position, you will list:

your sources of income: how much does each source bring in? Guesstimate if it is irregular.

Your expenses: how much do you spend and on what?

Your assets: What you own.

Your liabilities: What you owe.

Your net worth (wealth) is the value of what you own minus what you owe. More savings and investments mean more assets which leads to an increase in your net worth. Another way to bump this number up is to reduce the other side of the equation i.e. liabilities.

Now that we know where we are right now and where we are going, it is time to decide how we’re going to get to our end goal.

There are five key areas to consider:

Budgeting

Managing cash

Financing large purchases

Investing

Retirement planning

Budgeting.

Creating a budget is all about predicting your earning potential and spending patterns in the period under consideration.

You will want to estimate your expenses on a monthly basis and then fit in any one-off expenses or large purchases. This will be heavily influenced by your income in the same period.

A few weeks ago, I ran a poll on twitter asking people what bank accounts they maintained. I had interesting conversations as a result ranging from “my account is just a place to hold cash” to a very sophisticated system of maximising returns on cash that would otherwise have been sitting idle.

Managing cash or liquidity is a process of ensuring you have enough cash to cover your daily expenses and a little extra for emergencies. You can allocate your Emergency Fund to short term (less than 1 year) investments to enhance its value. In this case, you might consider: Fixed Deposit accounts, Money Market Accounts and Call accounts.

Financing Large Purchases.

There are two main options available to you here: delayed gratification and borrowing.

If you choose to go through the delayed gratification route, you will need to determine how much you need to set aside periodically to make the purchase within your desired timeframe. This will go in your budget as a reminder to actually move the funds. You can combine this with what we have learned about liquidity management to earn interest on the money while you save.

Taking out loans is not as commonplace in Nigeria as elsewhere in the world because of the high risk lenders associate with consumer borrowing. If you choose to follow this path, these are some things you ought to consider:

How much you can afford to borrow

Maturity of the loan (how long do you have to repay it)

Interest rates: make sure to have the lender explain in as simple terms as possible until you can fully appreciate the interest implications of the facility. If you don’t understand it, DON’T SIGN THE FORMS!

Other sources to consider are:

Your company’s cooperative society – they usually lend to members at below market rate and are regulated by the government

Informal saving clubs aka Ajo

Investing.

Once you have your liquidity management plan in place, any excess funds should be allocated to investments. The primary objective of investment is to earn the highest return possible. You must bear in mind though that there is a risk trade off. The higher the return, the more risk you will have to assume.

This is one area that a lot of young people neglect in making a financial plan. It’s a statutory requirement for companies to set up Retirement Savings Accounts (RSAs) for their employees. This is a useful primer on how they work.

The main concern here is whether this is sufficient to fund your retirement.

A few things to consider in making an assessment of your retirement needs are:

Living expenses in retirement – this will be determined by lifestyle choices. Quiet retirement or living it up?

Healthcare costs – there are a number of health issues that are associated with old age. Do you have a plan for covering the associated costs?

Investments vehicles – it is important to pick investments that will earn a high enough return while preserving your capital. The type of investments will typically change as you get closer to retirement because the objective of your portfolio will change over time from earning high returns to paying out regular income.

Will you have dependents when you retire? Will you have enough saved up to cover their costs?

Emergency funds – Uncertainty is a fact of life so you will have to maintain an Emergency Fund even in retirement.

When you are done creating the ultimate financial life plan, it is important to put systems in place to automate the different parts. This is the only way to ensure you stick with it in the long run.

Did she preach or did she PREACH?! Don’t let this fall on rocky ground o. Get. To. Work.

The entire point of being thealarorois to have the best grip on my finances. Create Value. Earn. Save. Spend. Give. Create Value. Earn… it is a continuous cycle.

A day before my birthday, I had a very insightful session in preparation for 2016 with her called “Plan Your Best Yeat”. She has packaged all the necessary resources for you to have a(n) *insert your best word* 2016 here, all for free! Isn’t she amaaazing?!

Thank you very much, Sisi on A Budget for sharing with us. We appreciate you and we wish you an awesome 2016!

Follow her on Twitter, like her page on facebook and subscribe to her blog. If you have more questions, send her an e-mail via sisionabudget@gmail.com!